Key Takeaways:
UK headline inflation accelerated to 2.9 percent in July, its fastest pace since March, as a 13 percent jump in the household energy price cap pushed price growth further above the Bank of England's 2 percent target.
UK inflation accelerated to 2.9% in July, its fastest since March, as a 13 percent jump in the household energy cap pushed price growth above the Bank of England's target and lifted September rate-hike odds.
"The energy price cap increase alone added 0.5 percentage points to July inflation, erasing the progress suggested by June's softer print," said Ellie Henderson, economist at Investec.
Core inflation, which strips out energy, food, alcohol and tobacco, held at 2.6 percent year over year, above the 2.5 percent consensus, while services inflation eased to 3.4 percent from 3.6 percent. Gas prices surged 14.7 percent year over year, the largest monthly jump since October 2022, lifting the typical dual-fuel bill by 221 pounds to about 1,862 pounds. Sterling ticked up 0.08 percent to $1.3545 after the release.
The Bank of England, which held rates at 3.75 percent in July by a 6-3 vote, projects inflation to peak near 3.2 percent by October and stay above 3 percent through mid-2027. Markets now price at least one quarter-point hike by year-end, with the next decision due Sept. 17.
The acceleration was driven largely by household energy prices after regulator Ofgem lifted the price cap by 13 percent at the start of July, a move announced in May that captured the first wave of wholesale gas spikes following the outbreak of conflict in the Middle East. Brent crude trades near $90 a barrel, and Goldman Sachs analysts said energy inflation should rise further at the next print given recent increases in petrol and diesel prices, pushing headline inflation above the central bank's forecast.
The steadiness of core inflation, alongside a cooling in services prices, offers some reassurance to rate-setters who have emphasized those gauges as the best read on underlying pressure. Wage growth slowed to 4.1 percent in the three months through June, with private-sector earnings edging down to 2.8 percent, and vacancies fell to 707,000. Yet goods inflation rose to 2.2 percent from 1.7 percent, and food producers warn that drought conditions across the UK and Europe could push grocery prices higher into 2027.
For the Bank of England, the prospect of further inflationary pressure has strengthened the case for raising rates this year. "If inflation continues to surprise on the upside — and it could get closer to 4 percent — the Bank of England will be forced to raise interest rates," said Joe Nellis, head of economic research at MHA. "More restrictive monetary policy would not be beneficial to an economy that is already expected to slow down later this year."
The economy expanded 0.4 percent in the second quarter, or 1.7 percent on an annualized basis, outperforming several major peers including the United States, and BoE Chief Economist Huw Pill said stronger growth supports the case for higher rates. New Prime Minister Andy Burnham has sought to cushion the blow, cutting value-added tax on energy bills from October and capping bus fares, a measure the central bank estimates could trim the fourth-quarter price cap by roughly 45 pounds.
Ofgem is scheduled to announce the next price cap for October through December on Aug. 26. If the Strait of Hormuz situation keeps Brent elevated, another upward adjustment could extend the inflationary episode through the winter, testing the BoE's patience and the government's fiscal arithmetic. ING analysts, by contrast, see little reason for the BoE to hike through 2026, expecting rate cuts to resume in 2027.
This article is for informational purposes only and does not constitute investment advice.
